IBR, ICR, PAYE, and IBR. Wait, what?

Dealing with Federal loans means understanding industrial acronyms. But what do you do when the same acronym means different things – or multiple acronyms mean almost the same thing. Does a letter really make a difference? You bet it does!

Today we’ll discuss income driven plans – repayment based on income.

IBR – Income Based Repayment

IBR came out in 2009 and is the most popular of the little used repayment plans based on income. With IBR, monthly payments are based on 15% of disposable income after comparing your AGI (Adjusted Gross Income) to the poverty level for the family of equal size. It also comes with forgiveness if any of your loan balance is not paid off after 25 years. Right now that forgiven balance would be taxable. It might not be in 25 years – that all depends on how well we lobby.

ICR – Income Contingent Repayment

ICR came out in 1993. It was good until IBR was introduced. It is rarely better than IBR. The reason is, ICR not only looks at your income, it looks at the balance of your loan too. The larger your balance, the less helpful ICR is. The main reason a borrower might need ICR is if they have Parent PLUS loans – because the only income driven plan a Parent PLUS loan can use is ICR. This also comes with 25-year forgiveness.

PAYE – Pay As You Earn

Paye is/was the Obama plan. It’s like IBR, but uses only 10% of disposable income instead of 15% like IBR. The forgiveness time frame is also shortened to just 20 years. The catch is trying to qualify. PAYE is for borrowers with no balance before October 1, 2008 AND a new loan after October 1, 2011. Basically it’s for members of the class of 2013 through 2017.

IBR – The NEW IBR

And here is where it gets confusing. Believe it or not, there is a NEW IBR. It does the same thing as PAYE, lowers from 15% to 10%, and forgives any remaining balance after 20 years, but is only good for a borrower with no balance prior to July 2014. That’s why I say PAYE is for class of 2017, because many members of class of ’15, ’16, and ’17 will have loans prior to July 2014. Class of 2018 and beyond will likely have no loans before July 2014, if we are talking about undergraduates.

ISR – Income Sensitive Repayment

The most useless of all income driven payments. So useless that if you’re on it, get off now! The formula is the same as ICR, based on income and loan balance. The worst part is, there is no forgiveness. A borrower could be on this plan forever and never pay their loan off. Which begs the question, why would anyone ever want this plan? They wouldn’t. Hopefully everyone on ISR is reading this post and giving themselves a face-palm. It’s OK. The industry won’t tell you these things. But now you know, so switch your payment plan ASAP!

But, but…

…none of these plans look at my expenses. You’re right, they don’t. If you have a choice between paying your Federal loan or your private loan, pay your Federal. Why? Fed can take your wages without a lawsuit, can offset social security, can take your Federal tax refund, and just make your life hell. Private lenders, on the other hand, must sue before anything negative happens. They also have to win the lawsuit, and not all private lenders can win in a court of law. Personally, your odds are better against a private lender than you think. That’s for another post.

But, but (again)…

…I’ll never pay my loan off with these low payments. That might be true, but we don’t care. Your balance will be forgiven after 25/20 years. More importantly, these low payments are likely to help borrowers survive, be consumers, and keep the economy moving. Yes, there are arguments for and against this, but that’s not today’s topic. This is just information for borrowers to make smart choices, find affordable repayments, and stay out of default.

If you’re concerned about the tax liability from the 25/20-year forgiveness, you should write your local Congressperson to lobby for tax-free forgiveness.

Comments

I thought in December of 2015 either New IBR or PAYE was expanding to include older borrowers? Taking a large # of people out of 15%/25yr down to 10%/20yr. I have fed loans issued between 2002-2010, currently in 15%/25yr, do you have any insight on these future changes? Thanks!

I live in San Antonio, TX, and I have over 100k in private and fedral student loan debt. How can I find a BK lawyer that will specialize in student loans for BK. I filed Ch 7 in 2010, but at that time my BK lawyer did not help me with my student loan debt so I’m hesistant going back with him. Any direction on where I can find an attorney for hire that specializes in this area?